Bank margins appear to be coming under pressure as Reserve Bank governor Alan Bollard yesterday announced he was keeping the official cash rate (OCR) at 2.5%.
Government-owned Kiwibank launched a special one-year fixed loan rate of 4.99% soon after Dr Bollard's announcement, a mere 0.29% above its best one-year fixed deposit rate of 4.7%.
Craigs Investment Partners broker Chris Timms said that was an indication of how much cash was flowing into banks from investors as interest rates stayed low.
Kiwibank, and other retail banks, needed to lend out the cash that came in, even at a reduced margin.
"People have been investing in the short-term market hoping for a rise in interest rates in the coming months. That is not happening."
The low OCR was a bonus for the sharemarket and investors might start looking there for higher returns, he said. Companies listed on the NZX were providing an average return of 6.5%.
Higher quality companies within the NZX were providing returns of about 7% and 8% which was "not too bad" considering what was on offer on fixed-term deposits, Mr Timms said.
It was time for investors to look at the NZX and treat their share investments as they would a rental property and enjoy the sustained income that would come from the shares, he said.
While some economists were picking the Reserve Bank to lower the official cash rate, or introduce some exchange rate intervention, Mr Timms said he thought that was an unlikely scenario.
Inflation was below the middle of the central bank's target range of 1% to 3% and inflation was still the primary focus for Dr Bollard.
The first rise in the OCR had been forecast to happen in either December or March.
"December is a long way off and I would struggle to see any catalyst for pushing up interest rates. But I would struggle to see a cut, as inflation is right in the middle of the band."
Mortgage rates were not so dependent on the official cash rate, as banks needed to borrow more from New Zealand depositors to fund their lending, he said.
Many people were still sitting on a floating rate, waiting to see if the Reserve Bank started to push up rates.
"No-one is wanting to fix anything. Kiwibank might be worried where interest rates will go in terms of cutting.
"That could be the reason for the attractive short-term lending rate. But there is a lot of short-term deposit money that needs to get out."
